With the proposed takeover of Yahoo (NASDAQ: YHOO) by Microsoft (NYSE: MSFT) announced last Friday, market observers are already suggesting that this might usher in a new wave of merger and acquisition activity in 2008. Microsoft’s offer for Yahoo, approximately $45 billion, is expected to strengthen software giant Microsoft’s attempt to compete with the number one search engine on the internet, Google (NASDAQ: GOOG).
Market observers point out that Yahoo, with slowing earnings growth and a stock price that has slumped to a near four-year low, was primed for takeover, or at the very least needed the boost from a strong partner or alliance to even keep its faint hopes alive of trying to catch up with Google in the lucrative internet advertising and search area. Google currently has a near 60% market share of the search business, while Yahoo follows with nearly 24%. Google has led the way in monetizing online advertising.
Other possible suitors such as Time Warner (NYSE: TWX) or AT & T (NYSE: T) or News Corp (NYSE: NWS.A) have been mentioned as bidders for Yahoo, but this seems unlikely. Microsoft, with its tremendous pile of excess cash, clearly lives on a larger scale than all other potential players and can afford the acquisition. More likely, Time Warner may seek to spin off its AOL business, which has recently attempted to beef up its search capacities. Whether there will be a market for AOL as a spin off remains to be seen.
While technology companies have much more free flowing cash at hand than, say, industrial companies, it does not necessarily mean that this expected wave of merger activity will take place. Yet to be determined is how Microsoft will deploy its new acquisition if and when it does acquire Yahoo.
There are other sectors of the market, however, with strong merger and acquisition possibilities. The financials come to mind. Washington Mutual (NYSE: WM) is one such obvious candidate, and Bank of America (NYSE: BAC) has already agreed to purchased beleaguered mortgage lender Countrywide (NYSE: CFC). Etrade (NASDAQ: ETFC), the online brokerage, is also mentioned as a candidate.
The Microsoft deal would be the largest in M and A since 2006, but non-believers in the trend point out that merger and acquisition activity peaks at the top of a heated market, which may not be a likely scenario right now, and whether the private equity activity will heat up and follow suit from the Microsoft deal or others, is also not a given. Should Microsoft’s purchase run aground in some way—and this has been known to happen—or other potential takeovers in the marketplace prove too costly, unclear or even unattractive, then cash and equity won’t necessarily be thrown into M and A deals.
These trends are likely to be clearer after the Microsoft-Yahoo dalliance is resolved.
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